What happens if a director misuses a Bounce Back Loan?
IPA Insolvency Practitioner newsletter, October 2022
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Bounce Back Loans were introduced by the government as an emergency response during the height of the Covid-19 pandemic. All SMEs adversely impacted by the pandemic, regardless of sector and industry, could obtain a government-guaranteed low-interest loan of up to £50,000 to help them weather the storm.
Due to the widespread impact of the pandemic, limited guidance was issued regarding what the loan could be spent on so long as it was for business – and not personal – purposes. As every business was experiencing their own unique challenges and financial pressure points during this time of unprecedented business disruption, it was decided that directors were best placed to allocate this injection of cash as they saw fit; the important caveat to this was that Bounce Back Loan funds must be used in a way which would provide an economic benefit for the business.
This broad definition allowed for the funds to be directed to areas of the company’s operations or financial position, which most required help. For some, the money was needed to purchase stock, others required help in paying utility bills and other committed monthly outgoings, while other businesses may have needed to bolster their cash flow position in anticipation of a drop in business activity during periods of government-imposed national lockdowns.
While all of these uses constitute perfectly legitimate utilisation of Bounce Back Loan funds, the scheme was unfortunately not without those attempting to fraudulently obtain or use this money. In fact, it is estimated that 11% of all losses incurred through unpaid Bounce Back Loans can be attributed to fraud. Fraudulent use of the Bounce Back Loan scheme is split into broadly two types:
- Those who applied for a Bounce Back Loan despite not meeting the qualifying criteria for the scheme;
- Those legitimately eligible for the money, but guilty of misusing the funds once received.
Those falling into the first category wrongfully obtained a loan by either overstating their businesses turnover, or applying through a company which had already ceased trading, was undergoing dissolution, or was incorporated after March 2020. The second category is mainly comprised of those who used the funds for personal benefit rather than legitimate business activity.
If a company is unable to repay its Bounce Back Loan, and either enters into a formal insolvency process, or an attempt is otherwise made to strike the company off the Companies House register, there could be serious consequences for those found guilty of Bounce Back Loan fraud.
As Bounce Back Loans represent taxpayers’ money, the government are understandably keen to recover as much of these fraudulently obtained or fraudulently used Bounce Back Loan funds as possible. Legislation was passed in December 2021 by way of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which strengthened the government’s powers of investigation when a company is struck off while holding an outstanding Bounce Back Loan.
Not only does this legislation increase investigative powers leading up to the proposed strike off of an insolvent company, it also gives the Insolvency Service the ability to restore companies which have already been dissolved should Bounce Back Loan fraud be suspected. This legislation makes it much more difficult for a director to close a business in order to escape misuse of Bounce Back Loan funds.
Depending on the scale of fraud involved, there are a wide range of possible penalties for Bounce Back Loan fraud including:
- Fines
- Disqualification as a director
- Imprisonment
- Personal liability
- Personal bankruptcy restrictions
The distinction between what is classed as personal money and what is company money may at times not be immediately obvious, particularly to inexperienced or unsupported directors trying to navigate the complexities of owning and operating a business in today’s challenging economic climate. However, in the eyes of an insolvency practitioner, the Insolvency Service and the law, this is not seen as a valid excuse for mismanagement of company funds.
When it comes to ensuring corporate compliance, the buck stops with the directors; having adequate knowledge to meet the numerous legal duties and responsibilities morally expected and legally required is a key part of the role.
Care must be taken when extracting money from a business to ensure this is done in a responsible and compliant manner, taking into account the legalities and tax liabilities of this action. Using a company bank account as an extension of a personal bank account – whether there is a Bounce Back Loan involved or not – can lead to a director finding themselves in extremely hot water, particularly if the company later finds itself in an insolvent position.
This guest article is written by Keith Tully, founding member of Real Business Rescue and partner at Real Business Rescue’s Liverpool office.